Q&A
Since You Asked
| Professional trader Don Bright of Bright Trading (www.stocktrading.com), an equity trading corporation, answers a few of your questions. | 
Don Bright of Bright Trading |
SPECIALIST ACTIVITIES
Is it possible to know when the specialist is bidding and offering stock during the day, aside from the opening or closing? In the book Day Trade Online by Christopher Farrell, he suggests that you can identify when the specialist is bidding and offering by looking at the bid and ask size. He suggests that specialists normally bid and offer in 500 or 1,000 share amounts, because they never want to accumulate large pieces of stock unless they are forced to do so. They want to keep their powder dry in case a big seller or buyer comes along. Also, he suggests that when the specialist is bidding and offering, the bid and ask size will be evenly matched and in round numbers (that is, 5X5 or 10X10), whereas orders from the public often have uneven size (such as 34X109). The goal of this is to identify where the specialist is bidding and offering, then jump in front to increase the probability of winning trades (knowing that the specialist is the best daytrader in his stock and knows the best levels at which to buy and sell). Is this right? What other clues do you look at to determine where the specialist is? Also, does open book help in identifying where the specialist may be bidding/offering? Thanks for your help - Guy Truicko
You have described the basics of looking for specialist markets. You also want to see the actual trades that go by, their size, and whether they are in the middle of the quote. I don't suggest putting a bid/offer on the "inside" of their markets (that will just upset them). We do enveloping when there is an illiquid market, on the outside of the national best bid/offer (NBBO). This way, we get to take advantage of price improvement when a bigger order comes in.
SCALPING
Suppose a scalper is looking to trade a stock that is 25.00 bid, 25.20 ask, 5X5. Will he have priority over the current bidder (customer order, not specialist) if he bids 25.00 for 2,000 shares? In other words, if he has bigger size will he be executed before the 500-share bidder? Will the order size change to 25.00-25.20, 20X5, or would the scalper have to bid 25.01 in order to become first in line? What is the NYSE rule on that -- does size take priority in that case? Thanks for all of your help -- Guy Truicko (I'm almost finished with my Series 7 study!)
Time priority (first in, first out) would apply here -- and the amount coming in for sale, if there was a much larger block bid. The basic rule of thumb for "reflecting" (showing) bids or offers is that if the order is in for two minutes, they must either "trade it or show it." This applies to hitting bids or taking offers and matching orders, and if you improved the NBBO (national best bid/offer) as you said, even by a penny or so. By the way, don't be trading stocks that have a 20-cent spread on a $20 stock.
STOCK BASICS
As a student preparing a master's degree in finance, I have an assignment to write about stocks. I would like to know what are the main factors that can change the value of a stock. Thank you in advance -- Satinka Xo
Very timely question, since as I type this response, my brother is explaining fundamentals to our five-day training class. The short list of what to look for in the valuation of stocks includes:
A. Book value (BV) (this number can be found on various websites, including Yahoo! Finance). BV is simply how much money would be left if the company were to sell its assets. For example, today GE has a book value of $7.18 and the stock is trading at $31.72. So the stock is trading approximately 4.39 times book value. This is not as bad as it may seem, since GE also pays a dividend.
B. Dividend yield is the amount of money you will receive divided by the stock price. GE pays an annual dividend of 76 cents, which equates to a dividend yield of approximately 2.41% (0.7/31.72).
C. Price/earnings (P/E) ratios (stock price divided by the amount of earnings for the company). The smaller the number, the better. GE is about 22.20 (earnings per share of $1.42 times 22.20 equals the current price of 31.72).
Do a little comparison shopping by checking these three numbers and you will be amazed at what you come up with. Always keep an eye on the management of the company as well. Are the people in charge strong, valuable leaders? Are they involved in any scandals (though there are really too many of those to mention these days)? This is the "x factor" to consider when pricing a stock.
These three primary numbers will give you a good idea of how well the stock is valued and how near that value the stock is trading. It may appear complicated, but it really isn't. I think by obtaining references from STOCKS & COMMODITIES you will be able to find more in-depth studies, but this should get you started.
E-mail your questions for Bright to Editor@Traders.com, with the subject line direct to "Don Bright Question."
Originally published in the December 2003 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2003, Technical Analysis, Inc.
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